Saturday, 24 August 2013

Listening to Alison Munro, chief executive of the High Speed 2 rail project, protesting that costs hadn't risen on the radio this morning, I had a faint sense of deja vu. In between assuring us that "there is no blank cheque" (which usually means that the numbers involved have too many zeroes to even fit on a cheque), Ms Munro gave a masterclass in the popular sport of capital project obfuscation. Here are some of the most elegant gambits:

'The previous costs didn't give the full picture'. Who on earth would expect the bill for a railway project to include trains? Or an Olympic budget to include policing costs? Of course these items were always seen as extra, even if not explicitly, so their inclusion does not represent a cost increase. Of course.

'The increase is in contingency'. The apparent increase in the budget is therefore the result of prudence, not prodigality. Ministers have wisely allocated additional funding, sometimes squirelled away in departmental budgets, to allow for any cost overruns, whether from unforeseen circumstances, changes in specification or lax cost control.

At the beginning of a project, these contingency allowances are 'very unlikely' to be spent. As the project continues, they gradually shift and slide to form part of the budget, below which the project will therefore be delivered. In 2007, the revised Olympic budget of £9.3 billion included more than £2 billion contingency. In 2013, the Government announced that the eventual cost of £8.8 billion was £500 million under budget. (This explains, by the way, why Government is so reluctant to pass this saving to the National Lottery.)

'The original budget didn't include provision for Value Added Tax'. Some government entities have VAT exemptions; others have to pay VAT but cannot reclaim it like businesses would, as they are not selling goods and services to the public. But surely, you might say, this is just a matter of one government agency adding 20 per cent to costs, so they can pass the money straight back to HM Treasury (who gave them the money in the first place)? Is this a budget change, is it sleight of hand? God (and the Chancellor) only know.

'The original figures were nominal values'. Public bodies (and many private bodies too) initially present project costs in the prices that would theoretically have been paid had the whole project been built and paid for in a single year (2011 in the case of HS2) rather than over the actual period of time taken to build it, during which costs would inflate. The use of nominal values helps comparison of different proposals that would be delivered at different times, and revenues should inflate as much as costs do, but outturn costs that are double the nominal costs originally stated nonetheless add to confusion.

The net impact of these manoeuvres is that a project that was originally stated to cost less than £30 billion can rise to £42.6 billion through increases in contingency, add a further £7 billion for trains, and finally grow to £73 billion to take account of VAT and inflation. Each of these changes looks reasonable in itself, but taken together they make it look like Government is playing a game of fiscal Find-the-Lady, where virtually any number can be defined or redefined as the cost of a project. This probably does not do much to boost public confidence in politicians.